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Oil: The mood for the industry ‘is quite dark,’ Vanda Insights CEO says

Vanda Insights Founder & CEO Vandana Hari joins Yahoo Finance Live to discuss crude oil hovering around $75 a barrel, oil demand concerns heading into 2023, the global economy, recessionary risks, and the outlook for the oil market.

Video Transcript

[AUDIO LOGO]

BRAD SMITH: Welcome back. Oil is sitting at around 75% to kick off 2023 as demand concerns continue to weigh on investors. But our next guest is expecting a long road ahead to reaching the next equilibrium point for crude. Vanda Insights' founder and CEO Vandana Hari joins us now. Great to have you here with us this morning. At what point and what timeline are you looking at, and does your calculus kind of show that we will reach that equilibrium?

VANDANA HARI: Morning, Brad, and thanks for having me. It's a major recalibration in process as we step into 2023. The center stage for the oil markets is, of course, a global economy. And as we know, and I'm sure you've been discussing all day long in your shows as well, huge question marks on where do we have a recession, the length, the timing, the depth of the recession and so on.

But all in-- when sitting from the perspective of the oil market, basically the mood is quite dark right now in terms of economic headwinds. And of course that relates directly to oil demand. The one bright spark going into the end of last year was, of course, China doing an abrupt U-turn from its zero-COVID policy and starting to reopen.

That is now still a bright spark, of course, because that's going to change the calculus quite a bit on global oil demand. But a distant one. So I think that is also playing into the bearish pressure that we're seeing in oil right now, basically that China has run into quite a bit of difficulties overcoming it's-- basically reopening. And that it's going to probably get much worse in China in terms of mobility and economic activity before it starts getting better.

JULIE HYMAN: So given that we are seeing slowing globally and that the China reopening even though it's happening is a bit rocky, is there anything that's going to provide a floor under oil prices right now? And if so, where do you see that floor?

VANDANA HARI: Yes, so Julie, you know, temporarily, and this happened throughout the last quarter of last year as well, we had what I call bouts of Fed pivot optimism. And that's been a constant. I believe that will remain with us. Of course, right now it seems to have taken a back seat.

But basically the market betting against the Fed continuing to tighten. And I see that quite a few consensus views still out there are that the Fed will pause sometime in Q2 and actually start to cut rates in the second half of this year. Now, whenever that has happened in the past few months, we've seen crude get quite a lift as well. So on a sort of-- but that tends to be short lived. But that's a floor, if you ask me what might support.

The other I guess obvious floor is, as I said, Chinese demand coming back. Chinese reopening looking more stable and solid. But again, that's probably not happening until at least the second quarter of this year. The final floor will obviously be OPEC plus, moving to cut production even more. But I don't believe they will do anything soon. I think they'll remain in a wait and watch mode. I think prices are still well above that pain threshold.

BRIAN SOZZI: And Vandana, I'm looking at natural gas down more than 40% since December 15. What has driven that move, and do you see more declines there?

VANDANA HARI: Yeah, so Brian, Europe has had great relief actually in gas through the autumn and months and stepping into the winter season. First of all, I think they did phenomenally well actually in stocking up gas for the winter months. So they had-- going into the winter season, they had very good storage levels of gas throughout 2022.

They've been buying a lot of LNG to supplement-- to plug the gap in supplies from Russia. And then they've had a mild start to winter and a mild winter so far. So-- and plus consumption has been cut back quite a bit. You'll recall there was an agreement amongst the EU members to voluntarily reduce their consumption by 15%. And they've been generally quite successful at that.

So as far as gas and Europe goes, and that was the main pain point in terms of gas markets globally, there's quite a bit of relief right now. But we don't know what the summer months might bring, even though gas demand goes down, that's when Europe has to start stocking again for winter. So you know, it all depends on whether Russia yanks the reins again on gas supplies to Europe and things could get worse again.

BRIAN SOZZI: Despite the pullback in crude oil, prices, some big names in this space, Chevron, Exxon are expected to still pose billions and billions of dollars in profits this year. How do you think they will distribute those profits to shareholders?

VANDANA HARI: Yeah, so last year was obviously a bumper year for oil and gas producers thanks to high oil and gas prices. This year of course, they may not perform that well. I think what the likes of Exxon Mobil and Chevron will do as a result is probably they'll get even more cautious in terms of their spending, make sure they get good returns on whatever they are spending.

I think the mantra for them remains to continue rewarding shareholders. So we've seen announcements of share buybacks. Those will continue. High dividends, those will continue. And these two companies in the US are continuing to focus on oil and gas. They-- whatever capital expenditure they have planned is mostly going into oil and gas, which is quite a contrast to their peers across the Atlantic.

And basically they are consolidating. This was a trend for the past several years. They have been shrinking their global footprint. They'll concentrate in the Americas, basically remain in the discovered and developed basins and try to maximize their profits.

BRIAN SOZZI: Vandana Hari, Vanda Insights' founder and CEO, always good to see you. Happy new year.

VANDANA HARI: Happy new year to you.